Get Under the Hood of Your Business: Law Firm Financial Reporting

I’m Melissa Shanahan, and this is The Law Firm Owner Podcast Episode #274.

Welcome to The Law Firm Owner Podcast, powered by Velocity Work, for owners who want to grow a firm that gives them the life they want. Get crystal clear on where you're going, take planning seriously, and honor your plan like a pro. This is the work that creates Velocity.

Hi, everyone. Welcome to this week's episode. We are talking today about financial reporting for you as the owner. There are a couple different ways you can do this. It depends on the size of your business and it depends on the support that you have around you. But we're going to talk through what should be in the report, the cadence you should get a report, and how you can you should get it.

There is no perfect blueprint for this. There are ways you can do this. There are ways you can keep up on what is happening from a financial perspective in your firm and really keep tabs. So I'm going to give you a way today, maybe actually a couple ways. And you can decide how do you want to do it, what would be easiest to integrate in your world given the tools that you're currently using.

I don't think you need to go out and buy some fancy software. No, just use what you have, and figure out how to get these numbers in your hands and at what cadence you want to.

So with that, I'm going to start by talking about the report itself. I'm going to talk about what should be in the report. And then I'm going to talk about cadence, how often you should get this report. That really depends on your firm size and what's happening with growth. And I'm also going to talk through, after that, why it's so important to do these things.

So many of you, as listeners… and I've been there before as well… are flying by the seat of your pants and getting clued in about what's going on with the numbers, but really don't have a handle on the numbers. And I am going to help you shift out of that.

It's not going to serve you as time goes on. I don't even care if you're not an owner that really wants to grow, you’d just rather optimize. Listen, you need to have your hands around this topic. You need to understand what's going on from a financial perspective in your business.

It doesn't mean you have to know everything. It doesn't mean you have to have all the answers. But it certainly means that you should have good questions. You should have answers and where you don't have answers, you should be able to ask really good pointed questions.

And this is an indicator, when you have knowledge and you know what questions to ask, because of what you're seeing, that is a really good indicator that you are forming a base understanding, a base knowledge, that serves as a great foundation for you as a business owner.

There's an evolution to this. You can build on this, and you should take turtle steps of progress with this. And so with this episode, just like every other episode I release, I want you to think about this in terms of steps. And what is the next step for you to become a more informed business owner about your firm?

So wherever you are, progress, not perfection. Turtle steps for the win. I'm going to lay some things out for you, and you decide what your next version is that you'd like to step into.

Okay, so first, what is involved in a financial report? Here are the things that I care about knowing and that seem to be, for clients, the stuff that they care about as well.

The first is the amount of cash in the business. That is an important number. You should know that number. At any given point, you should have a read on how much cash there is in the business.

The second is the balances of each one. This is bank account balances, credit card balances, line of credit, which I guess is a bank account, but any account associated with the firm, you should know the balance inside that account. As well as notes about why there has been a shift, a big shift or jump in one direction or the other. You should be able to know why without having to go dig in.

The next thing is the amount of cash in through the door. And I don't mean sales, because sales could be still sitting in your payment processor, right? It hasn't hit your bank account yet. I mean the money that came into the bank account.

And we'll talk about timeframe, like when per day, per week. We'll talk about that; it depends on where you are with your firm.

And then on the flip side, cash out; cash that left your bank account. These are basics. If you can get these basics, and if you had these at a set cadence that you decided on, that would be amazing. Which I'll say more about why it will be amazing in just a little bit.

I'm going to give you a guideline on the cadence of these reports that you should consider. So let's start with a smaller firm. If you're under $200,000 in revenue, I would say once a month is fine. But you should know these numbers once a month. Now, you may get more information from your accountant, like a month-end report from your accountant that has additional things, and that's fine. But these things you should know as well.

And a lot of times this isn't on a report that an accountant is going to give you, so this is a separate thing. Oftentimes an accountant will send you a P&L, but they may not send you some of the information I'm sharing here, so you're going to have to figure that out.

How are you going to get this information? It likely won't be the accountant. Maybe it'll be the bookkeeper. You can arrange with a bookkeeper to give you this information monthly, or maybe someone internally that you can give access to be able to see these things and it's their job to put this report together every month. Okay, so that's if you are under $200,000 in annual revenue.

If you are between $200,000 in annual revenue and $750,000 in annual revenue, weekly is great. Every week, if you got these numbers, for most firms and for most owners, that would be enough to have your finger on the pulse of things.

If you're over $750,000, then a daily report is more appropriate for where you are and where you're headed.

What we're going to do now is talk about some of the big reasons why this is an important practice to get into. And then I'll go back, and I'll get a little more nuts and bolts again with the actual report.

First of all, if you have access to this kind of information at your fingertips, it enables you to make informed decisions based on current financial performance, rather than outdated data. You'll hear us a lot say, “We go on numbers, not hunches.” There are so many times when I meet so many law firm owners… that understandably, I get it. I get why they are where they are... and they don't have this information at their fingertips.

Which is what I see as my job, is to help them get information at their fingertips that will help them be better business owners. But if they don't have that, then they're going on hunches. And this comes to hiring, it comes to firing, it comes to raises, it comes to bonuses. They make decisions and mismanage their money because they don't have facts.

So that's a super important reason just right out of the gates. Then that should be enough... I have more reasons here... But that should be enough.

And with this information, with the facts, you can identify trends, you can see opportunities, you can spot issues early. It helps you be proactive in how you're managing things at the firm.

And all of that really allows you to take action before little problems become big setbacks, or before you make a decision that's going to cause a huge problem; there wasn't a problem, and you're about to create a big problem because you're going to commit to a certain amount of spend that isn't reasonable for where you are right now, for where the money is right now.

The other thing this helps with is cash flow management. Yes, we talked earlier about what money is there and making decisions about spends and investments. But really, on a more granular level, if you have this reporting given to you, it's going to help you track cash in-cash out, and it's going to provide a better picture of cash flow.

And if you understand your cash flow, and you understand the patterns, it can help you in planning for the future expenses. It can help you make sure that you have sufficient cash reserves. Also, you'll likely see more quickly, it'll be highlighted any delays in client payments or billing issues. And that means you can get on it and have a quick resolution, and help cash flow maintain a steadiness. So all of this is important with the day-to-day and month-to-month cash flow management.

Another big benefit is transparency. Yes, for yourself, if you don't have a partner and you are a sole owner, absolutely for yourself. It's “facts, not feelings.” Again, I'm just going to keep coming back to that. There are no hunches. Everything's on the table. You know exactly where things stand.

And if you have a partner, it's even more important… or partners. Having this level of transparency… This report should go out to all the equity owners, no matter what. Because if there is a misunderstanding about the numbers in the business, how are the equity partners supposed to be good business owners?

So I think sometimes the split is so delineated, which is good in terms of role and responsibility that… For instance, if there's two partners, one partner is just more deep in the legal work and managing the legal work that's happening, and then the other partner is more on the business instead of in the business.

Even though there aren't a lot of to do's, or focus, that the in-the-business partner has to be executing on, they should still be in the know because they're an owner. And the reason this firm is working is because one of you are in one side and one of you in the other; that's how you've arranged this and this is how it's working. And so if both of you don't have access to the numbers, then you are not centered in any conversation around the facts.

Not that you can't get there. I know there are a lot of you that have really great partnerships out there, and there are some that are really hard. And the more it can be around “facts, not feelings,” the better you are set up to have healthy conversations and to keep a really healthy relationship as a partnership.

If one person is privy to that information, and the other is not, that is not right. It's not fair. It shouldn't be that way. You both should have access to the financials of the business with this report, in whatever cadence that makes sense for you. I gave you a good guide at the beginning of this podcast. So transparency is a big deal.

And accountability; these numbers are never hidden. There's never anything going on where the right hand isn't talking to the left hand. And then once you really figure out later that there's a problem, it can become a bigger dramatic issue than it needed to be if everybody's just on the same page right up front.

Again, as a sole owner it's easy to get buried in the legal work and not look at these numbers. But if you are given this report, on the cadence that makes sense for the size of your firm, then you will not be in that scenario.

So getting this set up for yourself, what we're talking about today, is a way to prevent you going through something that could have completely been prevented by having these numbers at your fingertips.

Another reason having these insights is important, is because it will allow you to pick up on discrepancies or something irregular that's happening that you don't understand. And that could mean fraud or financial mismanagement, something's going on, and it can cause question marks. And when you have question marks, you should dig into those question marks and get answers. And the earlier you detect that stuff prevents bigger financial losses.

I don't mean to be fear inducing with this, but it happens. It happens. And there's just no reason for you to not have a finger on the pulse of your numbers. This is how people get away with fraud for so long when they do. And I've been in not many, like maybe two practices ever. And I mean, this is when I was at the consulting firm through now.

I've dealt with two practices that have had some sort of fraud going on that they weren't aware of. We were able to help them see it, and they corrected it, but wasn't pretty. And it wasn't fun. But if they would have been able to catch that sooner, because they were seeing these things sooner, it just wouldn't have gotten as far as it got.

And since I've started Velocity Work, I haven't had any clients that I have seen them experience that. I have asked clients to look into it because something seems off, and when they look into it, we do find the answer and it's not something fraudulent that's happening with someone that works in their firm or anything like that.

But you’ve got to keep your eyes wide open. You’ve got to know what's going on. And most of the time, you're not going to be dealing with fraud. But it doesn't mean it can't happen. It doesn't mean it doesn't happen out in the world. Knowing your numbers will help prevent this.

Another reason to track this is because it will help you see where you are in relation to your goals. If you're a growing firm, if you're trying to get somewhere and do something and get leverage and give yourself space and time back, you're going to have to keep your eyes on certain goals.

If you are inside of Velocity Work at all, you absolutely have a revenue goal. We try to figure out from there what other supporting goals will help you get to your revenue goal. But in this financial report, you will get the income. And that's what we consider the revenue goal; the money that has been brought into the firm.

And so if you have a cash-in report, you can keep track of and be logging your progress, and know that you're getting closer and closer to it. And if you're feeling a slowdown, figure out why. Because you set that goal for a reason. We don't do pie-in-the-sky goals. We do goals that make sense, and that we can get our way to… We are executing on a plan in order to get our way to.

So this helps keep you in tune with what's going on with those numbers. And it's not just revenue, also profit margin. In here, one of your account balances… Many people, if you know of Profit First, or abide by a version of that… which we do here at Velocity Work, and so do many, many of our clients… it means that you have an account set up that's just for profit, and so we allocate money into the “profit” account.

This report, you're getting account balances, it lets you see how you're doing in terms of profit. Now monthly, you'll get an even better picture on the profit margin. But it's good to see what is happening with the number that you are striving, for the benchmarks that you set, the milestones that you decided on. This helps you really see your progress towards those things.

Now may be a good time to mention, because I know that some people are going to be listening to this and say, “Well, what about the other KPIs?” Yeah, yeah, KPIs are a thing we have talked about tracking on this podcast; we will talk about it more on this podcast. Having KPIs, which are essentially targets.

They are numbers where you say, “Hey, these are indicators, and these indicators need to be sitting at X.”  It tells us that everything is okay. It tells us that we are on track. And so yeah, those are important. And those are things that aren't related necessarily, they aren't the financial numbers, but they're still really important numbers in the firm.

Things like number of new cases through the door, conversion rate, number of new leads. It could be number of hours billed if you're an hourly firm. Number of signing meetings if you are an estate planning firm, for example. But KPIs matter, and they matter to a firm. It's like, what are the important numbers inside of this firm? And once you identify what’s the name of the indicator, then what is the number that needs to be hit?

Yes, all of that is important. But that is not what we're talking about today. I'm talking about financial reporting. Because I don't care if you know your number of cases to the door and your conversion rate. If you don't know what is going on with the cash in the business, what is flowing it in exactly, and what is flowing out exactly, and what that means for the balances that are left in the business, then we are having a short-sighted conversation.

It is not a holistic picture. I don't care. Like I said before, the number of new cases coming in, or your really good conversion rate, it doesn't tell me the full picture of the health of your business, period.

I have met people with good KPIs, with the two stats that I just gave you as an example, but they're broke. Why is that? So yes, there are KPIs that matter, but this what I'm talking about today. I'm just talking about financial reporting. And this is its own thing. This should be paid attention to in its own way.

You can have goals that will fall within your financial reporting, will report on how you're doing towards some of those goals, but this isn't your full set of KPIs, so to speak. And your KPIs, the other indicators in the firm that you've said matter, that does not mean that things are going to be healthy financially. You have to look at a round picture of numbers.

And so this, the financial side, most people do not have their finger on the pulse of this. They do but it's like first, they look at other things; number of consults, number of signing meetings, design meetings, depending on the kind of firm you are. They look at things that are important, but then they're not looking at this side.

So this conversation today is really about the other side, the under the hood, the health of the business. And if your business doesn't have cash, and if you're constantly broke, and it's not just a window where you're tight on cash because it was a strategic decision, it's just that way, then you have to fix that. You're not going to create the freedom for yourself that you're looking for if this is broken.

And the only way you're going to know if this is broken or not, or if it's an ideal or not, is to get consistent financial reporting that's going to give you this information.

Which sort of leads me to the last and final “why” that I want to share with you all. Maybe it's the most important. Maybe it trumps everything else. It’s peace of mind. There are so many times I talk to owners, and I'll ask, “Okay, what was your income in the last 12 months/last year, last calendar year? You can even tell me that,” and they don't know the answer.

And if I push them, and I say, “Okay, well, just -ish, what is it?” They don't know what to say. They think it's something, and then they go back and forth like, “Just let me try to look it up.” And so then they take time looking it up. I'm like, “Wow, that's the business's income.” And then if I asked them, “What were your expenses last year? What was your profit margin?” They have no idea. None at all.

I do love having these conversations with owners, because I'm pretty connective. When I'm talking to somebody about this, I don't make them feel like crap because they don't know these numbers. But I'm certainly not going to not ask them. And so when I ask for these, and if they don't know what to say to me, “I don't know. I can always make payroll,” and they hold up a fingers crossed sign. That's not peace of mind.

If you're crossing your fingers hoping that payroll is going to go through, that's stressful. That wears on you. And that's just the tip of the iceberg. I mean, if they don't know that, there's a lot that they don't know.

And so I really see it as my job to be a partner with people to help them get the information that they need, so that they feel empowered to make certain decisions and be able to have answers to basic questions about the business. Really, this is about teaching people how to become better business owners.

Now, I'm talking to people who don't know that, and sometimes I'm talking to people who do. They absolutely know their revenue; they can tell me that and they can talk to me about the number of new cases per month. They can talk to me about the people that work in their firm, what their conversion rate’s like, and the parts of the business that they know that needs to be worked on first. And that's awesome.

But again, from a financial perspective, just knowing your revenue isn't good enough. Because what you find, when you start to look under the hood, is that they do not have hardly any profit margin.

Or maybe they have an okay profit margin, but when I start to get in there and really look at the finances, I see how much money is being spent on people, for example, and they had no idea that it was a huge chunk of revenue being spent on people. Maybe they had hunches, but they didn't know.

So this financial reporting will get you more in tune. It will get you asking the right questions. It will ensure that you are informed with the basics, just the basics, of the health of the business. And with that, you can make very good plans for your company and for your team, and for your time. And have “facts, not feelings,” which means you're being more responsible with this business that you have and that you've built.

Okay, let's go back to a little bit of the nuts and bolts when it comes to this reporting. So always before, what I did… and then I read Buy Back Your Time and dug into Dan Martell stuff, and he has something that he does that I'll share with you.

But first of all, I have an accountant and a bookkeeper, that is outside of the business that handles my stuff formally. But inside the business, I have someone who is just financials. So she will look at… and this is a part time job for us at the moment… she reconciles and make sure that the bookkeeper has everything categorized the way that it should be categorized.

She is the go-to for the accountant. She's the go-to person for the questions. And then if she needs me, she gets me involved to answer certain questions. And she, we together… I would start them and she spruce them up and make them pretty… we made some spreadsheets. Because I wanted to know all the ins and outs.

When my business got to a certain point, I really felt blind. I didn't feel like my accountant was giving me what I needed. And really, what I wanted isn't something typically what your accountant would give you unless you had a specific special arrangement.

So I started building sheets to see the daily entry into the spreadsheet; there's a column for sales, a column for cash in... So if it’s just because it's a new member, for example, they may have joined yesterday, but the money isn't in our bank account, it's in the payment processor at the moment, so that's different.

So sales, and then cash that hits our account, cash that leaves our account, and then the expenses for the day. For example, if I make a credit card payment, then it's cash out of the account, but it's not an expense; those expenses were on the credit card. And that's why I have that separated out for sales, cash in, cash out, and expenses. That's the first setup.

And then I have space for balances of the accounts in the business. So every single day, there's a balance that's reported for every account in the business. And this was just so I had this information.

Well, the spreadsheet, though it's beautiful and rainbow colored and whatever, this spreadsheet became a bit of a go to. Her and I would communicate over this, she would enter in all of the numbers into the sheet… Once I built it, learned it, then I passed it to her… she made it pretty, and she's continued to enter in the data.

With this information, I felt so much more in control of what was going on. We've been doing this for a couple of years now, so I'm used to having this, but I have to go there. We have to be in a meeting if I'm going to see this. And so what we started doing about a year ago, is that she would send me a screenshot every day and drop it in Slack for me in a DM.

And in that screenshot would be the row where I've just explained to you all the number of sales, cash in, cash out expenses, and then the balances. And that was great. That was working well. Every week, she would do a Loom, walking through the current state, what the week entailed, and because we have so much now, in terms of patterns and expectations, we know what's coming out when, we know what's coming in when, so now she can even project forward and give me the scoop on what is coming up.

There are usually never any surprises. Every once in a while we do have a surprise, like a big expense that we weren't expecting, but normally there are no surprises. So that has been working well.

Now we're getting ready to revamp to what I'm going to tell you next, or tweak… I guess it's not really revamp… and this came from Dan Martell. First of all, when I heard this from Dan Martell, I was thinking, “Man, it's always validating to know you are on the right track.” Because everything that he wants in his reports, his daily financial reports, we have. So that was cool.

But I do think that once you get your groove with this, there's some value in thinking about how to structure this differently. It's not just a screenshot. I think it would be easier for me to read if it was laid out a little bit differently, so what we're going to start doing is a version of what he shares.

He calls this a “daily cash blueprint”. He does his through email. I'm not going to do mine through email, because I don't we don't email internally inside the company, so I'm still going to keep it in Slack. And also he has multiple companies.

So in his subject line, the first part is the acronym of the company. The second part of the subject line is the total amount of cash in the business. And then the third part of the subject line is the date. So he has that as a subject line. And inside, he has the account balances.

And those account balances essentially should add up to the number that was in the subject line, because that's the cash in the business. So the account balances add up to the number in the subject line, but they're itemized out, listed out. And if there is a 20% increase or decrease either way, there are notes there underneath those balances as to why that could be.

Because a client made a large payment. Or it could be because maybe you are on every other week payroll instead of twice a month payroll. And so if it's a month where there's three cycles of payroll… That's an example. Which, by the way, if you're on every other week, I highly encourage you to switch to twice a month.

It creates so much more predictability in the business when it comes to cash flow. It'll change your life. But okay, this is not what this is about. So after, there are some notes why there was an increase or decrease, over 20% increase or decrease, in the account balances.

The next section is receivables, and for us it’s cash in... Because he goes into this, he talks about receivables. I'm talking about the receivables that actually hit your bank account, not that you just sold, but actually hit your bank account. And I call that “cash in”. And then of course, the last number is payables, or what I call “cash out”; it left your bank account.

So that is the rundown. Now here's what we're also going to do. I'm going to have this dropped in Slack. I'm going to have it listed the way that he's recommending. I want to try this out. I want to see what insights I gain. I want to see if I'm surprised by anything, etc, etc.

But the other thing I'm going to have in this report for me, when it comes to cash in-cash out, I want to know… yes, yesterday, right? Because this is going to be daily… but also “month to date”. So there's going to be yesterday and then MTD, a section for that. And so that is what is dropped every single day to me.

And that will give me a really good read on what's going on. Because, again, if I go to the spreadsheet, I can see it all, but I don't want to go to the spreadsheet every day, I want a report dropped to me. And we're kind of at the point where that's not hard at all, it's just the next evolution. So I’m excited to start this.

But that's Dan Martell's daily cash blueprint. He gets an email for every company he owns, and those are the four things that are in it; the subject line, which includes the cash balance in the business. And then inside the email, the account balances, account by account. And if one or more is up or down by more than 20%, then there's a note. And then the receivables and the payables.

Again, he defines those… I think some of you think of “receivables” as money out there that's coming to you. No, he's talking about money to hit your account. So again, I call that “cash in” and then “cash out”. So that is a rundown on his version.

I want you, now that you've heard this episode, I want you to think about how can you make sure that you get what you need, on the cadence that you want it… and run with the cadence I gave at the beginning of the call, there's no harm in that.

If you want that cadence, how can someone get those numbers for you, and drop them to you when you want them? This is not rocket science. There is a little organization up front, if you are not really squared away with this stuff. But once you have it figured out, you're going to get it every single day, week or month. However often you have dictated that you want it.

And you are going to be different as a business owner. You will have so much more visibility, be able to make numbers and not have to go digging for numbers, and you'll be able to make better decisions. And you will have peace of mind about exactly where things are. So I want you to think about this for yourself.

I really recommend that you push pause after you listen to this, don't just go to the roll into the next podcast. I want you to stop for a minute and just think about what would it take to get your hands on those numbers. And then, who is the best person that you could delegate these numbers to?

Now, you can get creative with this. It could be a VA that works for you. And maybe one VA gets two numbers for you, and the other one gets the other numbers for you. But they're all dropped into a sheet. And then you can go from there. You can ask your bookkeeper which ones she's willing to do on the cadence that you want.

There are ways you can go about this, but start the conversation. Do not let this live in your head as an idea and die in your head as an idea. Start the conversation with someone who can help you think through this, with someone who can say, “You know what? I could totally pull that number.” So just don't let this die.

This is your ticket to knowledge and understanding about this awesome law firm that you own. And the whole thing is being a good steward of the business. Really knowing your business, really understanding the financials of the business is a huge win. Huge win. So start small. Start on a monthly cadence, if that would be a big leg up for you right now.

If you're already doing that move to weekly. If you're already doing that, does it make sense to move to daily? Would that be useful? Would you like to start your day every day just looking at that, being in tune with it before you hit your day? What do you need? What do you want? But make sure you're taking your next step, that you're levelling up from where you are. That's all that matters.

And then, after you settle in with that, you could take another next step. And after you settle in with that, you'll take another next step. It's been an evolution for me when I'm working with clients on anything to do with their numbers and data. It's an evolution for them. And it can be an evolution for you too.

Alright, everybody, have a wonderful rest of your week. I'll see you here next Tuesday.

Hey, you may not know this, but there's a free guide for a process I teach called Monday Map/Friday Wrap. If you go to VelocityWork.com, it's all yours. It's about how to plan your time and honor your plans. So, that week over week, more work that moves the needle is getting done in less time. Go to VelocityWork.com to get your free copy.

Thank you for listening to The Law Firm Owner Podcast. If you're ready to get clearer on your vision, data, and mindset, then head over to VelocityWork.com where you can plug in to Quarterly Strategic Planning, with accountability and coaching in between. This is the work that creates Velocity.